Cotton prices flat, but risk is to the upside

Carl Anderson described the much-needed wet weather in the greater Lubbock, Texas, area as $100 million rains that will surely put Texas growers on target for a good crop this year.

Overall, rain has been an erratic benefactor in the United States this spring, as too much has fallen in the Mid-South and not enough in other parts of Texas and much of the Southeast.

Anderson, Extension specialist emeritus, speaking at the Ag Market Network's recent teleconference, said USDA's U.S. cotton production estimate of 14 million bales for 2008-09 is still reachable, however. “It would take some very adverse weather not to, or if we get a big surprise in the acreage report on June 30. With all the weather and delayed plantings in other crops, the number is more uncertain than usual.”

While Anderson says he is “kind of bearish” on the cotton market, he stresses that producers need to be ready to price cotton. “We have so much cotton in the world, and we have about 10 million bales (in ending stocks) in the United States. It's going to be very difficult for this market to move up. Based on fundamentals, July futures would have trouble gaining much on 72 cents.

However, “outside factors, the value of the dollar, other commodity stocks and other commodities can move this market in the short run way beyond 3 to 4 cents. So have your marketing plan in place. If prices reach the higher level, and you can see it is a short-run technical move, that's the time to make your move. But you're going to have to have it thought out before it happens.”

While these outside forces can push cotton prices higher for a short while, there is a cost, according to Anderson. “Volatility and the higher cost of risk management associated with speculative activity are running premiums up on options. There is a good bit of double hedging going on and a good deal of confusion. The basis for cotton is widening. This means risk management is costing more, and the producer is getting a lower price at a given supply-demand level.”

Watch for pricing opportunities on weather scares, says Mike Stevens, Swiss Financial Services. “For the next few weeks, the risk in the cotton market is to the upside. While it's still too early for the market to get too excited over the planting delays in Mississippi and Tennessee, we all know that weather markets can sneak up on you, especially when you know the speculative funds are watching the charts.”

Stevens pointed out that since May 1, the cotton market (July 2008) has been in a narrow trading range of 72.50 cents to the upside and 68.50 cents on the downside. “Anytime the July moves under 70 cents, you're going to have trade demand coming in. When it gets up around 72 cents, it starts running out of gas.

“If you want to sell July at 74 cents, you're going to have to have your order in, because if we get past those buy stops over 72.5 cents, this market is going to fly and it's going to fly fast. It's not going to hang around very long.”

Anderson noted that for U.S. cotton exports to reach USDA's projection of 14.2 million bales, “we have to ship an average of 343,000 bales every week from now until August. It's going to be interesting to see if that big surge is going to come. Sales to China have been excellent and could remain so, except when the nearby futures move a little above 70-72 cents, sales dry up considerably.

“The good news is that USDA cut carryover of world stocks by 6 million bales for 2008-09. That gets our stocks down to a more reasonable level, yet there would still be plenty of cotton to meet all the demand that we see in the market fundamentally.”

O.A. Cleveland, professor emeritus, Mississippi State University says world carryover of 61 million to 62 million bales and a 10 million bale U.S. carryover “have to keep the market on its heels until we get some significant production problems around the globe.”

Cleveland sees December 2008 cotton futures on the downside “at somewhere around 75-76 cents. On the upside, assuming we get off to an average start, I have difficulty taking December above 83-84 cents. If we have some weather-plagued crops, we could get into the very high 80s.

Stevens says a move upward in the July contract could move December 2008 between 83 cents and 86 cents. “That's without any production scares whatsoever. With problems, you could move into the high 80-cent range easily. I'd put a 78 cent bottom on December.”